Morgan Stanley turns bullish on emerging market sovereign debt

Morgan Stanley slapped a buy call on emerging markets sovereign debt on Monday, citing cheap valuations, the prospect of significant policy support, and the fact that sell-offs in recent months have created a space for investors to move into.

The US investment bank said EM (emerging market) sovereign credit spreads had stabilised at cheap levels, especially against US credit, fund outflows have stopped and issuance has resumed, suggesting that markets have priced-in much of the recent COVID-19 ‘shock’.

“While we don’t dismiss the risk of another lag-down, we see many factors as supportive,” Morgan Stanley analysts said.

So-called ‘high-yield’ countries with lowly credit ratings were “the only place to go” they added, recommending Argentina, Bahrain, Ghana and Pakistan.

Pemex (Mexico’s state oil firm) also remained a top pick. However, they said they’re not adding Egypt to the buy list as it is already “priced to perfection”. They also moved Ukraine down to a ‘dislike’.